What does diversification in investment mean?

Diversification in investment refers to the strategy of spreading investments across a variety of assets to reduce overall risk. This means that rather than placing all your funds into a single investment or a limited number of assets, you distribute your investments among different asset classes, industries, or geographical locations. The rationale behind diversification is that different assets tend to perform differently under various market conditions. When one asset may be experiencing a downturn, others in your diversified portfolio may be performing well, thereby cushioning the overall impact on your investment returns.

By diversifying, investors aim to minimize the risks associated with market volatility and enhance the potential for more stable returns over time. This strategy is widely recommended, especially for long-term investors looking to build wealth while managing risk effectively. In contrast, options that advocate for limited or focused investment strategies can lead to increased exposure to specific market risks, which is contrary to the fundamental principles of risk management through diversification.